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Amazon Evolving Into Profitable Growth Company

Amazon Evolving Into Profitable Growth Company

R.J. Hottovy: Wide-moat Amazon capped off 2018 with strong fourth-quarter results that confirmed our views about the company's evolution from being not just a growth company, but a profitable growth company with multiple free cash flow layers.

While some of the marketplace are looking at the company's first-quarter revenue guidance, calling for a 10% to 18% growth, compared to the 20% growth the company posted in the fourth quarter as a negative, we encourage investors to look at the company's entire portfolio, particularly AWS, advertising, third-party sales, and Prime membership tiers, and look at the potential free cash flow that these businesses could bring.

Another area of concern is that the company said that 2019 would be a heavier investment year. We don't think this is going to be the same magnitude that we saw in 2016 and 2017, and still believe that the different drivers such as advertising and AWS positions the company for at least 100 basis points of operating margin growth to around 6%.

Looking forward, while the retail component of the business is starting to slow a bit, as it naturally matures, I think these other business lines provide the company with a lot of different options and end up being high margin which provides the company with the ability to make other investments within the business.

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About the Author

RJ Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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